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Electricity market review addresses dysfunction and impending problems

Wednesday, 14 June 2017  | Ian Hore-Lacy




The ‘Finkel Review’ into Australia’s National Electricity Market (NEM) covering eastern and South Australia has reported its findings to government in the light of concerns about reliability of supply, lack of investment in new dispatchable plant to supply base-load and escalating retail prices.

The matters addressed in the Chief Scientist Alan Finkel’s comprehensive 212-page report are not unique to Australia. ‘Security and reliability have been compromised by poorly integrated variable renewable electricity generators, including wind and solar’ - security being about frequency control and other ancillary services, reliability about meeting demand. Furthermore, ‘existing wholesale and contract market investment signals alone are no longer a suitably dependable mechanism to ensure the reliability of the NEM’. (p83)

Arising from these observations is a major and likely game-changing recommendation to ‘develop and implement a Generator Reliability Obligation … [for all] new generators to ensure that adequate dispatchable capacity is present in each region’ (3.3).  But it is not clear how any realistic reliability might be achieved from variable renewables which utilise only about one quarter of their capacity on an unpredictable basis, so are certainly not dispatchable to meet demand. Some bundling with gas capacity is conceivable, the only gigawatt-scale storage option over days and weeks being pumped hydro storage, but we don't have enough water or gravity for much of that. So at face value this Reliability Obligation means that demand must be fully covered by coal or gas capacity, with a little help from hydro.

One of the immediate issues causing the SA blackout last September was inadequate frequency control from synchronous generators. This is normally provided by the spinning inertia of coal, gas, nuclear or hydro plants, but not by wind or solar. The review recommended that new generators should have fast frequency response capability, and transmission operators such as the Australian Energy Market Operator (AEMO) should ‘maintain a sufficient level of inertia’ for reliability (2.1).

The chronic problems in the NEM are most fundamentally due to the progressive overlay of subsidised intermittent renewables on the liberalised wholesale market, to reduce CO2 emissions. In responding to the popular support for an increasing proportion of wind and solar by means of our Renewable Energy Target (RET), governments at both state and federal levels have failed to address the challenges this creates for both reliability and investment to maintain that reliability. Hence,

All governments need to agree to an emissions reduction trajectory to give the electricity sector clarity about how we will meet our international commitments. This requires a credible and durable mechanism for driving clean energy investments to support a reliable electricity supply.

A Clean Energy Target concept is recommended (3.2), apparently to replace the RET, which is certainly not fit for purpose as it distorts both the wholesale market and, more seriously, the incentives for investment in reliable capacity.

As head of AEMO, the late Matt Zema’s remarks in April 2016 are important:

The renewable developments and increased political interference are pushing the system towards a crisis. South Australia is most vulnerable …. The system is only manageable with robust interconnectors but these operate effectively only because there is abundant coal based generation in Victoria.

Now Victoria has closed Hazelwood, which provided about one-fifth of the state’s power, so that qualification is moot. Zema continued: ‘Wind does not provide the system security. But the politicians will not allow the appropriate price changes to permit profitable supply developments from other sources. In the end the system must collapse’. Without a robust government response to Finkel’s review, we will remain in third-world territory.

The report makes no recommendation concerning generation technology (though a final chapter canvasses options, including nuclear), nor does it show credible back-up for the increasing share of wind and solar in its modeling (Fig 3.8). The Clean Energy Target (CET) is calibrated to 28% emission reduction from 2005 by 2030 in modeling, giving 15% wind + solar in 2020, 24% in 2030, and 53% in 2050 (all excluding rooftop solar PV which is 4% in 2020 and 9% in 2030). There is strangely little new dispatchable capacity. (8% hydro remains constant.) Even the 2030 figures involve some heroic assumptions in the modeling, and there is no way we will get to 24% wind and solar from the grid without a massive economic hit for the backup supply. Coal is reduced to 53% of supply by 2030. If emissions reduction is to be a major goal alongside reliability and affordability, then we will need nuclear power to take over a lot of coal’s role around then, though that is not modeled in the report.

The report also addressed gas supply, since the Victorian and NSW governments have locked up onshore resources when our need for them is increasing. Addressing this stupidity, the review recommends that

‘Governments should adopt evidence based regulatory regimes to manage the risk of individual gas projects on a case-by-case basis. This should include an outline on how governments will adopt means to ensure that landholders receive fair compensation. (4.3)

The NEM currently has 47 GWe installed capacity, including 4.34 GWe (9.2%) wind and solar (supplying 6-7% of electricity), with maximum demand almost 33 GWe, and it serves 9.6 million metered customers.

Reliable supply of electricity, without the cost being inflated by extraneous demands, is a basic social good that governments should ensure. The Finkel Report provides opportunity for reviewing that provision and revising some settings and incentives. Let’s pray that it doesn't become another political football to the detriment of homes and industries.

Ian Hore-Lacy is a founding Zadok board member (1978-98), author of Responsible Dominion - a Christian approach to sustainable development, and now Senior Research Analyst with World Nuclear Association. He is co-author of Down to Earth Discipleship, a pastoral ‘book’ on the web: www.downtoearthdiscipleship.com.


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